Investors on Wednesday were weighing whether this week’s sharp selloff in global software stocks had gone too far, as fears grow that artificial intelligence could pose an existential threat to parts of the industry.
The verdict so far: no clear answer — only more volatility ahead.
After tumbling nearly 4% on Tuesday, the S&P 500 software and services index slid another 0.73% on Wednesday, marking its sixth consecutive session of losses. Since January 28, the sector has shed roughly $830 billion in market value.
Software stocks have been under sustained pressure as AI shifts from being a growth catalyst to a potential disruptor. The latest wave of selling followed the launch of a new legal-focused tool from Anthropic’s Claude large language model.
The tool, a plug-in designed to handle tasks across legal work, sales, marketing and data analysis, highlighted how LLMs are pushing deeper into the “application layer” — territory long dominated by enterprise software firms. Investors fear that if these tools gain traction, they could siphon off revenue streams that companies rely on to fund increasingly expensive technology investments, potentially disrupting industries ranging from finance and law to software development itself.
Echoes of Amazon’s playbook
Some investors see parallels between the LLM strategy and the way Amazon.com once expanded from a niche online bookstore into a sprawling empire spanning retail, cloud computing and logistics.
Still, several analysts caution that success for AI models is far from guaranteed. Many argue LLMs lack the highly specialized and proprietary data required to fully replace enterprise-grade software. The selloff, they say, reflects investors scrambling to protect portfolios as rapid AI advances cloud valuations and business outlooks beyond traditional three-to-five-year forecasts.
“The selloff, which arguably began last quarter, reflects a growing awareness of AI’s disruptive potential,” said James St. Aubin, chief investment officer at Ocean Park Asset Management. “The moats around these companies look much narrower today. This may be an overreaction, but the threat is real — and valuations have to reflect it. My biggest concern is that this could be a warning sign for the labor market.”
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| Area chart showing The sector has experienced multiple sharp selloffs over two decades, with the current drawdown the worst since 2022's rate-driven rout |
Those fears were evident in individual stocks. Thomson Reuters, owner of the Westlaw legal database, fell nearly 16% on Tuesday after seven straight losing sessions, before rebounding almost 2% on Wednesday. MSCI slipped 1.8% after dropping about 7% the previous day.
In the UK, Relx closed down 1.3% following a 14% plunge on Tuesday, while the London Stock Exchange Group edged lower after losing nearly 13% in the prior session.
Overall, the S&P 500 software and services index has fallen nearly 13% over six sessions and is now down about 26% from its October peak.
Notably absent has been the familiar dip-buying that has often cushioned tech selloffs in recent years.
Spillover into broader markets
The rout rippled across financial markets. On Tuesday, shares of alternative asset managers including Apollo, Ares, Blackstone, Blue Owl, Carlyle and KKR fell between 3% and 11%, driven by concerns that stress in software companies could lead to credit problems. Most of those stocks recovered modestly on Wednesday.
Ares executive Kort Schnabel said on a conference call that only a small portion of the firm’s portfolio faces potential AI disruption, adding that the risk does not lie in core enterprise software holdings.
The broader market also took a hit. The S&P 500 fell 0.51% and the Nasdaq Composite dropped 1.51%. Major technology stocks slid amid AI-related worries, with Nvidia, Meta Platforms, Alphabet and Oracle all closing lower.
“There’s probably more downside ahead,” said Bill Strazzullo, chief market strategist at Bellcurve Trading. “The broader market appears to be topping out, and the risk-reward balance is starting to skew negative.”
Pushback against the AI panic
Not everyone is convinced that AI spells doom for software companies. Nvidia CEO Jensen Huang dismissed claims that AI will replace traditional software as “illogical,” saying time will prove otherwise.
Mark Murphy, head of U.S. enterprise software research at JPMorgan, called it “a leap in logic” to assume that a single LLM plug-in could replace multiple layers of mission-critical enterprise software.
While software firms may be vulnerable as AI automates routine tasks that have long supported pricing power, some strategists argue the market reaction has gone too far.
“The logic behind this selloff feels flawed,” said Talley Leger, chief market strategist at The Wealth Consulting Group. “Better AI tools should make it easier and cheaper to build stronger software products — which could actually improve margins, not destroy them.”
For now, investors appear stuck between excitement and anxiety, as AI’s promise collides with uncertainty over who ultimately benefits — and who gets disrupted along the way.